Not-for-profit Hospitals Enter Period of Greater Uncertainty

Expansion efforts and weaker operating margins are taking a toll on the not-for-profit hospital sector’s credit worthiness.

In an August report, “Tough Times Take a Toll on Credit Quality of U.S. Not-for-Profit Health Care Sector,” Standard and Poor’s downgraded 31 not-for-profit hospitals during the first half of 2008, including three hospital systems comprised of three or more hospitals. Twenty-five of the hospitals downgraded received low-investment grade ratings of 'BBB’ or lower, with nine hospitals receiving credit ratings below investment grade.

Accounts receivable management professionals have said such conditions may entice hospitals to sell younger medical debt to meet obligations (“Hospital Bond Defaults Create Opportunities for Health Care Debt Buyers,” Jan. 8).

Standard and Poor’s blamed the downgrades on greater spending on capital projects, expensive borrowed debt and difficulty recruiting and retaining referring physicians. Operating margins have also been squeezed by greater dependence on government payers and self-pay accounts, leading to rising bad debt.

Overall, Standard and Poor’s downgrades of not-for-profit hospitals outpaced upgrades nearly 3-to-1 in the first half of 2008. The ratings company said it expects the trend of downgrades to outpace upgrades at not-for-profit hospitals to continue through the rest of 2008 and probably 2009 and beyond as the sector heads into a period of greater uncertainty.

According to the report, smaller stand-alone hospitals have been the hardest hit by the downgrades and are more vulnerable to future downgrades because their size and independence may limit their ability to remain competitive. However, a prolonged stock market slump also could hurt stronger hospital systems, which tend to relay more on income from portfolio investments.

“Whether this credit quality gap continues to widen will ultimately depend, in our opinion, on the future of U.S. health care policy, which should become clearer early next year when a new president and Congress are in place,” Standard and Poor’s said. “Providers' ability to respond to current conditions and adapt to new ones will affect not only our view of their credit quality but also, quite possibly, their fitness to survive in a very tough industry.”

Standard & Poor's rates 138 health-care systems and 470 stand-alone hospitals.